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We have seen a soft market this week in global indices and the key question when we see such easing is: will this be an easing or the beginning of the next slide down?
Elliott projections will give us some very useful clues but for a change I thought I would leave Elliott aside and look at two indicators that help us get a better fix on market softness.
Firstly Bollinger Bands. JJ has written much on BB so I will not go into the theory but start by looking at BB across the DOW 30:
click to enlarge
You will note how the DOW has moved upwards in a strong formation since mid March. You can see how it hit the upper band in the second half of March, bounced off and then hit it again only a week or so later. But for most of the last few weeks the DOW has tracked the upper band upwards. When this happens there is a reasonably strong probability that we will see price bounce off and at least come half way back if not all the way back to the lower band. BB is dynamic in that the band direction changes and thus sometimes bands meet price and other times price meets bands!
So it was sort of ‘London to a brick’ that prices were going to come off. Yet many kept buying.
The next point of interest then is: ‘how will we know the pullback is complete?’
We then look to the oscillator. The first standout feature in this is that there is a negative divergence between price and the oscillator. That is the last leg of this move has been sort of a bit limp.
That aside we are now looking for the oscillator to come back to zero or thereabouts and that will be a guide. If however the oscillator fell much below zero we would have to contemplate that maybe we are seeing not just an easing but something more sinister.
I am not sure there is much value in postulating about the likely path forward right now as a few more days will tell the tale.
Enjoy the ride
Tom Scollon
Chief Analyst
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